Analyst Corner| Restore ‘buy’ on Motherson Sumi with TP of Rs 132

Since we put Motherson Sumi Systems (MSS) under ‘review’ in July, demand in domestic and key global car markets like US/UK/Germany improved 15-30%. Also, MSS surprised many by announcing aggressive cost-cutting initiatives in August. These developments should compensate for excess valuation paid for SAMIL (implied P/E at ~22x vs our ~16x). We restore our ‘buy’ rating with target price (TP) of Rs 132 (vs last published TP of Rs 126), implying ~25x/~16x FY23E EPS of DWH (`36)/SAMIL (Rs 96); ~6% increase in FY22E earnings and rollover. SAMIL would generate ~$3 billion OCF in FY22-25E, which would add ~$15 billion inorganic revenue, assuming deals at ~20% EV/sales.

Through M&A, key target areas of MSS are light metal stampings, auto lightings, suspension systems, HVAC and telematics (~$100 billion size of opportunity). Risks- second wave of Covid-19 impacting demand revival globally and earnings-dilutive M&A.

Deal valued SAMIL at ~22x FY19 earnings vs our expectation of ~16x. Our analysis of restructuring suggests deal was done at 22x FY19 incremental earnings (~10x start-up cost-adjusted earnings). We arrived at this multiple-based on incremental earnings for minority shareholders through restructuring and corresponding impact of 43% equity dilution of SAMIL. We believe fair multiple should have been ~16x vs ~22x, going by global peer set mean P/E of ~12x and ~30% weightage of India-based earnings (~25x).

What changed since the restructuring announcement? Since June, key car markets for MSS like EU/US/India reported improvement of 15-30%. In 1QFY21 results, MSS announced that ~84% of its plants are operating in excess of ~50% capacity with further improvement in September. MSS’s cost-cutting initiatives like manpower rationalisation (Alabama plant staff cut from 2.6k to 1.8k), scrap reduction by ~3%, lower logistics cost and reduced employee training ahead would push SMP Ebitdam to 8-9% by FY23E. These would result in ~4% increase in MSS’s EBITDA in FY22E.

FY20 annual report(AR) reveals 4x target revenue by FY25. FY20 AR also reveals MSS targets revenue of ~$36 billion by FY25. In last five-year plan, MSS targeted ~$18 billion by FY20 vs ~$5.5 billion in FY15 and achieved ~$9 billion in FY20.